Ygrene Energy Fund has completed the first rated securitization of Property Assessed Clean Energy (PACE) bonds backed by assessments on both residential and commercial properties.
It’s also the first deal backed by assessments from multiple states, California and Florida.
The transaction pools $150 million of PACE loans, which finance energy efficiency, renewable energy, and water conservation upgrades to buildings. The loans are repaid via annual property assessments with terms of five to 30 years that are based on the property’s value, not the borrower’s credit score.
Kroll Bond Rating Agency assigned AA’ ratings to the class A notes, which were privately placed with an unnamed insurance company.
Ygrene is currently the only multistate provider of PACE loans in the U.S.; it’s active in 150 cities and counties in California, Florida and Georgia. It’s also the largest commercial PACE originator.
To date, there have been four securitizations of PACE loans by another lender, Renovate America, in partnership with local California municipalities under the HERO Funding program, for a total volume of $633 million. Renovate America provides the financing for an expanding base of municipalities that include the Western Riverside Council of Governments and San Bernardino Associated Governments.
One of the hurdles to this Ygrene’s deal was getting Kroll comfortable with the legal framework for PACE in Florida (the rating agency isalready comfortable with the legal framework in California since it rates the HERO funding transactions).
The transaction’s structure had to account for differences in the way taxes and assessments are handled in the two states. For example, the two states handle tax delinquencies differently; California has the Teeter program, in which counties pay on behalf of delinquent property owners, assessing interest and penalties; Florida has a tax certificate sale process.
“One of the things we did is normalize the criteria to the highest common denominator that allows us to underwrite consistently with very high quality and consistent documentation and underwriting standards across all the jurisdictions that we serve,” said Ygrene President & CEO, Stacey Lawson in a telephone interview with Asset Securitization Report.
Incorporating commercial PACE loans, which represent 10% of the collateral, was also a challenge. PACE commercial loans are typically smaller than loans collateralizing commercial mortgage bonds. On average the loans pooled in Ygrene’s transaction are in the $400,000 range; whereas the typical CMBS loans are sized in the $40 million to $60 million region. However commercial PACE loans are much larger that residential PACE, which are typically sized in the $20,000 region.
Adding the loans to the pool introduced a new set of risks to the transaction pool, such as, concentration limits, industry limits — all of which can impact credit ratings, said Lawson.
“Achieving a double-A rating speaks volumes about the credit quality of this new asset class,” she said.
Ygrene’s bond will issue a single tranche of notes representing 97% of the value of the collateral; there is a 3% equity tranche. Typically, lenders take into account the credit scoring of the borrower in determining an advance rate, or the size of the loan in relation to the value of collateral. After confirming the current market value of the asset offered as collateral, the lender will notify the borrower of the maximum amount that can be borrowed.
Lawson said the deal was able to achieve the 97% advance rate “because of the exceptionally high repayment rate for taxes in the U.S., which is 99.987% repayment coupled with the additional process for getting near perfect collections on taxes.”
All PACE securitizations completed to date had similarly high advance rates. Bonds backed by solar leases, on the other hand, have had to pay more to access the securitization market. The latest deal issued by SunRun on July 1st, achieved a Kroll assigned A’ rating (the highest ever rating for a solar lease ABS). However, the deal had a 54% advance rate and credit enhancement for SunRun’s class A notes was 31.74% compared to 3% credit support for Ygrene’s deal.
Solar lease and power purchase agreement receivables are comparable to consumer receivables such as auto leases or home equity loans of the same size or term, which are exposed to more of a loss risk. “A massive amount of cash and credit enhancement has to go in for that rating to be achieved [on solar lease ABS],” said Lawson.
Lawson believes that it will soon be possible to issue PACE bonds with triple-A ratings.
“This asset is unique in terms of lien position and the types of risks to timing and recovery on the relevant payment streams," she said. "Right now the rating is AA’ largely because of novelty issues; origination volumes are still relatively modest. But ultimately, once volumes scale and more history shows that repayment rates are consistent with property tax repayment in general, deals will be rated triple-A”.
Lawson did not disclose the exact pricing Ygrene’s bond, but said it was comparably priced to the last HERO deal, which priced on April 27. The 10.3-year, AA’ rated, class A notes of that deal yielded 180 basis points over interpolated swaps, for an interest rate of 3.85%.
Lawson does not think that the Federal Housing Finance Agency objection to residential PACE programs should stand in the way of a triple-A rating. Fannie Mae’s and Freddie Mac’s regulator believes that PACE liens violate the terms of their prohibitions senior liens. There is a risk that it could challenge the validity of a PACE lien against a mortgagee’s security interest in court. A successful challenge may result in impairment of the PACE Assessments.
However Ygrene’s bond, as well as the other PACE bonds issued to date, are issued under municipalities in states that are protected by a standing PACE law, where PACE assessments are deemed collectible in the same manner as general property taxes and with the same lien priority.
Nonetheless the FHFA still has the ability to require that PACE liens are paid in full before it lends to borrowers looking to secure financing on homes that have a PACE lien. In other words, if the owner of a home with a PACE lien wants to sell to a borrower looking to secure Fannie Mae or Freddie Mac financing, the lien would have to be settled. This, said Lawson, could impact the prepayment rate and lead to higher prepayments in transaction pools, "but we are actually not seeing the FHFA take any of those actions. Our prepayment rate is 1.2%, very low”.
For its inaugural deal, Ygrene opted to privately place the bond with a single investor because the terms made sense. “We got good pricing on the deal and the investor locked in pricing as we originated the assets into our warehouse so we avoided any hedging costs between the warehouse and the securitization,” said Lawson. The investor also agreed to pay all of the structuring, placement and legal costs for the deal, which can run expensive for securitizations.